JCPenney and Kohl's are duking it out in a market sector they've revived

The JCPenney at Queens Center mall in Elmhurst, N.Y., is decked out for the holidays. Nothing surprising there. But visit the second floor, and you'll find something quite unexpected sandwiched between women's coats and fine jewelry: a 3,100-sq.-ft. Sephora, the European retailer known for its hip beauty products. The boutique is a miniversion of a typical Sephora store, replete with fanciful makeup and pricey skin-care lines presented on accessible, self-service shelves.

The lighting and signage are exactly the same as in a Sephora store, as is the black-and-white color scheme. Step out of the space, though, and the techno-pop sound track...